According to Sean Callow, analyst at Westpac, AUD has lost a lot of yield support on cross rates and thus understandably weakened against most major currencies as RBA rate cut expectations have become more entrenched.
Key Quotes
“The Aussie’s resilience against the pound therefore is quite notable, testifying to the renewed weakness of sterling from Brexit developments.”
“Sentiment over the pound has soured in recent weeks as mild relief over the 7 month Brexit extension quickly turned to concern that UK PM May’s resignation will produce a more hardline Brexit proponent such as Boris Johnson. This has seen real money accounts rebuild short GBP positions, with scope for more.”
“Of course AUD has also faced severe headwinds, with the RBA’s rate cut this week validated by Australia’s weak Q1 GDP data which reinforces the case for at least one more cut in coming months. But our baseline forecast is for a steady hand in July and with markets already pricing a terminal cash rate below 0.80%, AUD may well have enough bad news priced in for now in terms of yield differentials.”
“In coming weeks, we continue to see AUD rallies as limited against most majors. But the pound still seems to have room to price in deeper political turmoil, with the Tory leadership contest to drag out to late July and most contenders unlikely to try to appeal to the political centre. We see scope for sterling underperformance to around GBP 0.5600/50 or AUD 1.7700-1.7850 multi-week.”
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